CEO's Statement

To Our Shareholders,

We entered the used oil recycling business which we see as a new pillar of growth.

We executed a new funding strategy where we secured a US$138m syndicated loan facility from a consortium of banks and partnered the International Finance Corporation (IFC) to co-finance projects.

We reached a major milestone in our asset-light strategy with the divestment of our SingSpring assets to a trust.

In Algeria, we clinched the largest seawater desalination project in our company's history. We also secured a foothold in the Indian water market.

Most important of all, 2006 was a year in which we built and leveraged on our technology applications, human talent and financial capabilities to drive sustainable growth.

Financial Performance

In 2006, we focused on putting in place the building blocks for new growth. As a result, we have had to endure some short-term impact on our financial performance.

Our revenue was S$129.8 million, against S$131.5 million in 2005. Industrial sales achieved record growth of 59 per cemt to S$90.1 million. The municipal sector enjoyed robust growth although we are not able to recognise the revenues due to accounting treatment.

We experienced lower one time gains as compared to the previous year. Higher personnel and finance costs and development expenses were incurred to develop and expand into new geographical markets and a new business in oil recycling.

Funding Growth

Following the path of our asset-light strategy, we have achieved a new funding platform by divesting our 20 per cent equity interest in SingSpring Pte Ltd, owner of the first seawater desalination plant in Singapore, to CitySpring Infrastructure Trust, a subsidiary of Temasek Holdings Trust. After the restructuring in February 2007, Hyflux and CitySpring hold 30 per cent and 70 per cent respectively in the SingSpring Trust.

Going forward, this planned business trust structure will allow us to unlock the value of our other water assets at an appropriate time and thus redeploy financial resources to new projects and expansion into new markets.

Going Global

China
We continue to grow steadily in China, achieveing record industrial sales growth of 59 per cent in 2006. Strong demand came from the biotechnology and pharmaceutical industries where our membranes were used as part of their manufacturing processes.

We entered the China municipal market some two years ago, but despite this short history, we managed to make good headway by focusing on alternative sources of water. In 2006, Hyflux clinched five municipal projects worth RMB 395 million. Earlier this year, we secured another seven projects in Jiangsu, Jiangxi, Hebei and Tianjin, totalling RMB 593 million. We now have some 20 projects lined up from north to south along the coastline of China, covering water treatment and recycling, water purification and seawater desalination.

China's National Construction Ministry has drawn up a plan to equip all cities with wastewater treatment plants to treat 60 per cent of municipal wastewater by 2010. The deregulation of this sector is accompanied by the strengthening and enforcement of environmental controls.

As one of the pioneers in the China water industry with the capacity to offer capital, technology and expertise, Hyflux is in a good position to capture the market's immense potential.

China is, and will continue to remain, a very important market for Hyflux for many years to come. Our growth there will continue to be based on a conscious balance between the municipal and industrial sectors.

Middle East & North Africa (MENA)

One of the key highlights of 2006 was winning our largest project to date - a S$328 million contract to provide engineering , procurement and construction services for a 200,000m³/day seawater desalination plant in Tlemcen, Algeria. Hyflux has teamed up with Malakoff Berhad, a leading independent power producer in Malaysia, to design, develop, finance, construct and for 25 years, operate and maintain the plant.

Algeria is a fresh footprint for Hyflux in the MENA region. We believe that the Tlemcen project is the first of more business opportunities for Hyflux in that region.

India
We are pleased to report that our efforts in building up the Indian market have borne fruit. We are investing in a S$17.1 million industrial water plant at Hebbal, Bangalore, which will produce 15,000m³/day of high-grade water for industries. Going forward, we will continue to focus our growth on industrial sectors in India.

Used Oil Recycling - A New Pillar of Growth

Our strength as a membrane technology company has enabled us to identify niche applications in several sectors other than in water. In particular, we are progressing well with our new pillar of growth, that is, used oil recycling.

Our first commercial facility, a joint venture with SK Oilchem Management Pte Ltd, located in Tuas, has started commercial operations to collect, recycle and treat waste oils in Singapore using Hyflux's proprietary technology.

We are very optimistic about capitalising on our membrane technologies in this new field and we are actively pursuing partnerships to expand our oil recycling business globally - to China, India and Saudi Arabia.

Consumer Products - A Turnaround Story

We are happy to report that in 2006, the consumer sector accounted for 7 per cent of our Group revenue. Hyflux entered the consumer market in 2004 and gained a lot of valuable experience in the intervening years.

Earlier this year, we made a quantum leap by teaming up with major American residential water filtration manufacturer, Marmon Water LLC, to invest up to S$80 million in two joint ventures, including an R&D facility in Singapore and a manufacturing plant in China.

With this partnership, we will grow our consumer products division globally, with new market sectors and products.

Investing For The Future

Human Capital
People give a company its competitive edge, especially in a technology company like ours.

As Hyflux moves forward in the global arena, our initiatives and success in enhancing our workforce will continue to be one of our critical strengths. Hence in 2006, we focused on strengthening our team to support the accelerated changing needs of our global operations.

Research and Development
Hyflux is a technology company that is committed to developing new technology applications and intellectual property as its long term competitive advantage.

Our R&D centre in Singapore has a team of mroe than 100 researchers and engineers who improve existing technologies and processes, and commercialise novel technologies for the market.

We also collaborate with leading research institutions and companies as part of our multi-prong R&D strategy. In 2006, we secured an exclusive license to manufacture cutting edge ceramic hollow fibre membranes globally with the right to sell the membranes worldwide except Europe, through the acquisition of a 51 per cent equity in CEPAration B.V - a spin-off from a leading Dutch technology institute which owns eight patents in ceramic membrane technology.

Moving On

Looking back over the past year and where Hyflux is today, we believe we have put in place strong building blocks for success.

2006 was a transition year and the short term adverse profit impact from such transition should not be a trend line for the future. We are confident of going back on track to achieve our target of average 30 per cent compounded annual growth rate from 2003 to 2008.

As of 31 December 2006, we have a healthy order book of S$435 million (excluding projects in SinoSpring). We will continue to pursue growth opportunities in all our key sectors, particularly in Southeast Asia, China, the Middle East, North Africa, as well as India.

2007 will see us executing projects on hand; expanding through focused implementation of our asset-light strategy through restructuring of projects into trusts; as well as capitalising on our integrated technology in new applications that have great potential.

These approaches are wholly in line with Hyflux's determination to grow long term shareholder value in addition to providing stable and regular returns.

In Appreciation

I would like to express my deepest appreciation to each and everyone of you - our shareholders - for your unfailing support.

Our partners and customers have contributed much to our continued success. To them, I say a big thank you for sharing and learning with us.

I would like to acknowledge too, the invaluable contributions of former directors, Mr S. lswaran and Mr Hamed Kazim. Mr Iswaran resigned from the Board to resume political office.

To all of the 800 Hyflux staff in Singapore and around the world, I thank you for your efforts and dedication. More importantly, thank you for the zeal and belief that together as a team, Hyflux can achieve its vision to be the leading company that the world looks to for innovative and effective environmental solutions.

Olivia Lum
Group CEO & President